It’s September, which means the news articles covering the “September Effect” should be cropping up more frequently on financial news sites and in reader inboxes. Prepare your mental defenses.

The main takeaway of the “September Effect” articles is almost always the same – investors should prepare for heightened volatility and weak returns, and perhaps even hold off on investment plans until the Santa Claus rally takes hold in December.

But it’s all hubbub. Stocks do not follow a calendar, and they never have.

Even still, “September Effect” proponents point out that September is the only calendar month with a negative return over the last 100 years (when looking at the Dow Jones Industrial Average). Many also suggest there are definitive causes for the declines, like traders returning from summer vacation with ‘sell lists,’ mutual funds selling ahead of the end of the fiscal year in September, and individual investors selling ahead of September, which makes the “September Effect” a self-fulfilling prophecy. Again, all hubbub.1

What proponents often leave out of the discussion is the fact that terrible Septembers during the Great Depression, the 1974 bear market, the 2001-2002 bear market, and the 2008 Global Financial Crisis are all weighing down the average. What’s more, when you look at the S&P 500 over the last 25 years, the September Effect loses just about all of its luster. The average monthly return for the S&P 500 is just -0.4%, and the median monthly return for the index is positive. In my view, those just aren’t statistics that support overhauling your asset allocation.

In the current year, September skeptics are pointing to the ongoing pandemic, inflationary pressures, and the situation in Afghanistan as reasons to avoid stocks. To be fair, I’m not saying September will surely be positive—I’m just making an argument against the certainty that it will be negative. To me, the “September Effect” is not a reliable indicator because past returns do not predict future returns, and believing otherwise often drives investors to engage in short-term market timing – which I strongly oppose.

I have also seen folks argue recently that the stock market has not corrected in several months, and must therefore be due for a pullback this fall. I do not disagree that the stock market is due for a correction in the realm of -10% to -20%, but I do disagree with anyone who seems to know when it will occur.

Corrections are by definition unpredictable in onset, duration, and size. If anyone could predict them, that person would not only be wildly famous, he/she would also likely manage everyone’s money. But such a person does not exist. The next stock market correction may start tomorrow, one week from now, one month, or one year from now. No one knows.

What I do know, however, is that stocks are priced based on forward-looking fundamentals and earnings/earnings expectations, all of which look good to me in the current environment. Total S&P 500 earnings in Q3 2021 are expected to be up +26.2% on +13.3% higher revenues, and the chart below shows how Q3 estimates have been pushing higher since the start of the year. It may be September, but corporations are feeling confident about the outlook in the next few months. And that’s what I think investors should care about most.2

Bottom Line for Investors

The “September Effect” endures as a popular stock market pattern, but not because it is a particularly good or powerful indicator. It is neither. It endures because investors often look for patterns to help explain unknowns, and September’s reputation as the only negative month is seemingly enough to give investors an edge. But past returns do not drive or predict future returns, and what has happened historically in September bears no weight on what may happen this September – or any future September.

No month or time of year is better for stock market investors than any other. What really matters, in my view, is how earnings and earnings expectations may evolve from here. And from where I sit, it’s so far, so good.

Disclosure

1 Investopedia. April 23, 2021. https://www.investopedia.com/terms/s/september-effect.asp#:~:text=What%20Is%20the%20September%20Effect,for%20the%20month%20of%20September.&text=It%20is%20generally%20believed%20that,the%20end%20of%20the%20year

2 Zacks.com. August 13, 2021. https://www.zacks.com/commentary/1781776/3-things-to-know-about-the-q2-earnings-season

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